Have You Seen This?

Emerginvest

In the wake of the current global financial crisis, not all markets have been affected the same way. Emerginvest points you to the international markets and sectors that have already begun growing, so that you can build a strong, globally diversified portfolio.

In P.J. O’Rourke’s book Eat the Rich a chapter entitled
“How to Make Nothing from Everything” seeks to explain how Tanzania, a
country endowed with beautiful beaches, plentiful forests, rich
agricultural land, and magnificent wildlife, had contrived by the
mid-1990s to become one of the world’s poorest countries in the world
in spite – or, perhaps, because – of more than a billion dollars of
development assistance. An even better example might have been
Argentina.

The Financial Times a few
weeks ago reported that Argentina, one of the world’s largest
agricultural producers and until recently its fifth-largest wheat
exporter, may have to import wheat this year (“Prospect of Wheat Imports Looms,”
July 29). Farmers are expected to plant about 2.9 million hectares of
wheat this year, down from 4.2 million last year, the smallest amount
since records started over 100 years ago. The government has blamed a
drought, which has caused the worst planting season on record, and the
financial crisis, which has made it hard for farmers to raise capital
to buy fertilizer and seed. These problems are no doubt real, but I
don’t recall severe droughts in the Great Plains (and we have had
them) turning the U.S. or Canada into wheat importers.

In 1913, Argentina was the 10th (some say the 7th)
richest country in the world. Per capita income and wages were higher
than in almost every country in Europe, one reason that more than half
of all Argentines are of Italian descent. Since then, things have gone
badly. The IMF now ranks Argentina 58th in the world in per capita GDP based on purchasing power parity (PPP). In 1913 Argentina’s per capita GDP was about 85% of that of the United States. Today it’s around 30%. What happened?

This
year’s drop in wheat production can be directly attributed to several
years of direct government intervention in wheat trading, which
included a 2007 ban on exports followed by a 23% export tariff. These
measures correlate directly with a drop in acreage harvested from 5.8
million ha. in 2007 to 4.2 million in 2008, a drop in production from
16.8 to 8.4 million metric tons, and a fall in exports from 11.2
million to 4.5 million tons. Incentives – and disincentives – do work.

Governments
make this kind of mistake all the time, responding hastily and without
sufficient consideration to a current crisis. What is disheartening is
that the wheat cock-up is only one incident in a century of policy
disasters. Even when the economy has spiked in response to sensible
policy reforms (such as privatization and economic liberalization under
the Menem government), nothing seems to break the long-term trend of
decline, which by now seems to be deeply embedded in the
politico-economic culture.

One can certainly
blame Juan Peron for a great deal. Peron, a member of a military junta
that overthrew the government in 1943 and was then elected President in
1946, was an enthusiastic admirer of fascist economics. In 1938, the
Army sent him with several other officers on a study tour of Italy and
Germany. Though the trip’s purpose was to study those countries’
military organizations, Peron was highly impressed by Italy’s
corporatist system in which, in Mussolini’s words, “balance is achieved
between interests and forces of the economic world… [This] is only
possible within the sphere of the state, because the state alone
transcends the contrasting interests of groups and individuals, in view
of co-coordinating them to achieve higher aims.” Ideas do matter, and
these ideas wrecked Argentina’s economy and civil society in ways still
felt today. For some reason, Peron remains popular and Argentina’s
leaders still wrap themselves in his mantle. Carlos Menem and Nestor
Kirchner – as well as Kirchner’s wife and current President Cristina
Fernandez –call themselves Peronists.

Argentina’s
decline, however, started well before Peron came to power. Following
World War I, the country entered an era of negative or anemic growth
which, with a few interruptions, has continued to this day, and which
has provided more than a few thesis topics for students of economics.
The explanations
have included a resurgence of colonial-era mercantilism, militarism,
and political absolutism starting early in the 20th century, as well as
more recondite theories of insufficient capital, relative declines in
total factor productivity, and the effect of insecurity of property rights on
growth of the money supply. There is truth to all of these arguments,
but they all seem to distill into one, which I find most persuasive:
the “systematic creation of barriers to competition.” According to a 2006 article that
examines the causes of stagnation in Latin America in general, high
import tariffs and quotas kept Latin American growth rates low for much
of the 20th century, and it is no coincidence that those
countries that have liberalized the most completely – Chile is a
stellar example – have grown the fastest.

It’s
not just about foreign trade, though. Argentina’s economic reform has
been a history of half-measures, which negate many of the benefits
liberalization is supposed to bring. As an example, privatization of
Brazil’s iron ore industry increased productivity by 140%. Most of
Argentina’s state-owned industries privatized in the 1990s were allowed
to retain the same monopoly status they had enjoyed as state
enterprises, and productivity increased by an average of 46%. The 2006
paper’s authors state that: “policy changes that substantially affect
the amount of competition faced by Latin American producers
significantly and systematically change productivity… [which] suggests
that Latin America indeed can achieve Western productivity levels when
competitive barriers are removed.”

This is
hardly a surprise. Those of us who still believe in free markets would
have had to search desperately for explanations if the data did not
support this conclusion. The more interesting question, though, is how
Argentina, with a similar colonial experience to that of other Latin
American countries, has taken such a different path. It’s worth asking
why Argentina became so prosperous a century ago, when its neighbors
did not. And now it’s worth asking why, since the 1990s when so many
Latin American countries emerged from military dictatorship, Argentina
has failed to implement the same kinds of reform that has transformed
the economies of Chile and Brazil.

Disclosure: I own shares of iShares MSCI Brazil Index (NYSE: EWZ) and of Sadia (NYSE: SDA)